APPELLATE COURT OF ILLINOIS, FIRST DISTRICT, FIFTH DIVISION
529 N.E.2d 993, 175 Ill. App. 3d 408, 124 Ill. Dec. 876 1988.IL.1434
Appeal from the Circuit Court of Cook County; the Hon. Richard L. Curry, Judge, presiding.
JUSTICE PINCHAM delivered the opinion of the court. LORENZ, P.J., and SULLIVAN, J., concur.
DECISION OF THE COURT DELIVERED BY THE HONORABLE JUDGE PINCHAM
This is an action for an equitable accounting by defendants and counterplaintiffs Wolf and Company, an accounting firm (the partnership), against plaintiffs and counterdefendants J. Carlton Updike, Harry H. Wolf (Bud Wolf), Joseph F. Fox et al. Fox was a member of the partnership from July 1, 1973, until September 30, 1978, when the partnership was dissolved. While a partner, Fox received substantial sums of money from Bud Wolf and another company entitled Wolf Management Engineering Company (Wolf Management), both of whom were clients of the partnership. Fox concealed and kept these payments to him by Bud Wolf and Wolf Management from the partnership, claiming that the payments were for his legal services. The partnership's counterclaim against Fox alleged that Fox breached section 3.3 of the partnership agreement by receiving compensation from a third party without sharing that income with the partnership, that Fox had breached his fiduciary duty to the partnership and that Fox was therefore liable to the partnership for the payments he received from Bud Wolf and Wolf Management. At the close of the partnership's case on its counterclaim, Fox moved for a directed verdict. The trial court found that the partnership had failed to present a prima facie case against Fox for either a breach of the Wolf and Company partnership agreement or a breach of Fox' fiduciary duty to the partnership and granted Fox' motion for a directed verdict. The partnership appeals. We reverse.
Prior to its dissolution, Wolf and Company was a partnership of more than 60 partners. The partnership rendered accounting services, was headquartered in Chicago and maintained over 20 offices nationwide. Fox was a certified public accountant and a licensed attorney and was hired by the partnership in 1964 as a tax accountant. Fox became a senior tax accountant, serving several clients of the partnership, including Wolf Management. Fox left the partnership in 1970, but returned in 1971 as a tax manager at a higher salary. From 1971 to 1973, when Fox became a general partner in the partnership, Fox worked directly with Bud Wolf, who was also a general partner of Wolf Management, which controlled Jockey International (Jockey) and Blue Grass Industries (Blue Grass).
Richard Wheeland was the managing partner of the partnership's Chicago office from 1964 to 1970, the eastern regional partner from 1970 to 1972, the national administrative partner from 1972 to 1978, a member of the managing group and the executive committee from 1972 to 1978 and a member of the liquidating committee. Wheeland testified, on behalf of the partnership, that the executive committee recognized that the managing group's interpretation of the partnership agreement was that partners could not hold second jobs or engage in outside activities for personal remuneration other than "passive investments."
Richard Sharpnack, an employee and partner of the partnership from 1948 to 1978, and a member of the managing group, the executive committee and the liquidating committee, also testified on behalf of the partnership. Sharpnack testified that the executive committee repeatedly rejected the claims of partners to retain income from outside activities such as directorships and executorships and required instead that such income be paid over to the partnership. Additionally, Sharpnack testified that some partners were classified as engagement or maintenance partners because their personalities rendered them incapable of developing new partnership business. Sharpnack further testified that premiums were routinely applied to sophisticated tax work and that such premiums often resulted in bills for as much as 150% of normal billable hours.
Sharpnack, Wheeland and Fox each testified that in addition to the prohibition against receiving outside income, the partnership agreement required every partner, including Fox, to devote his full time and energies to the partnership's business; any time not spent on billable activities for partnership clients was to be spent developing new partnership business; every partner was expected to expand services to existing clients of the partnership; and every partner was expected to bring new business into the partnership.
Wheeland testified that Fox never brought in new clients or attempted to expand the scope of services performed for existing clients. Wheeland further testified that each partner was required to keep records of billable and nonbillable time devoted to outside business activities after normal working hours. Additionally, Wheeland testified, a partner who engaged in professional activities at home was required to report these activities in his time reports as if he had spent time with partnership clients. According to Wheeland, Fox was responsible for supervising all work done for clients of the partnership and for approving all bills before sending them to the clients. Partners were also required, according to Wheeland's testimony, to add premiums to bills for sophisticated accounting services so that clients would pay maximum prices while remaining satisfied with the partnership. Wheeland testified that Bud Wolf proposed to the executive committee that the partnership charge Jockey and Blue Grass premiums to be paid directly to Fox, but that the committee rejected this proposal because, "It was felt that any revenues that came to Wolf and Company for Mr. Fox's service should be revenues of Wolf and Company and not passed on through to Mr. Fox."
Fox testified that during 1975 and 1976, at Bud Wolf's request, Fox became the billing partner for the Jockey and Blue Grass accounts and as such was responsible for conducting the business affairs of Jockey and Blue Grass. Because most of the partnership's work for Bud Wolf and Wolf Management was billed through Jockey and Blue Grass, Fox automatically became the billing partner for Bud Wolf and Wolf Management also. Fox testified that when he became a billing partner he was instructed to maintain all past billing practices of the partnership, but conceded that he never added or attempted to add a premium to any of the partnership's bills to Wolf Management, Jockey or Blue Grass. Fox also testified that after becoming the billing partner for Wolf Management, Jockey and Blue Grass, he believed he deserved more partnership units and discussed his dissatisfaction with his very close friend, Bud Wolf. Fox testified further that on at least two occasions in 1976 Bud Wolf proposed to the executive committee that the partnership charge Jockey and Blue Grass premiums to be paid directly to Fox, but Bud Wolf informed Fox that the proposal had been rejected by the executive committee. Shortly after the executive committee rejected Bud Wolf's proposal, Fox testified, Fox began to provide Bud Wolf legal services for which Bud Wolf directly compensated Fox. Fox stated that he did not keep records of those legal services or of the time he spent providing such services, but that he, Fox, personally billed Wolf Management, which was Bud Wolf's company, according to Bud Wolf's instructions. Fox testified that from 1976 to 1978 he spent 5 to 10 hours weekly performing legal services for Bud Wolf for which Fox personally received approximately $200,000 from Bud Wolf and Wolf Management. Fox further testified that he did not bill his friends and relatives through the partnership for traditional accounting and tax services he performed for them and for which they paid him between $750 and $1,250 annually from 1976 to 1978.
Fox additionally testified that he submitted invoices to Wolf Management dated April 1, 1976, November 30, 1976, and December 7, 1976, for $3,000, $490 and $510, respectively. Each of these invoices contained the legend, "For professional services re legal and tax matters." Fox testified that they were bills owed him for" [the] interpretation of the [Wolf Management] partnership agreement, the [Wolf Management] trust agreement and any questions about Wolf regarding the legality of anything at Wolf Management Engineering Company." Fox explained that on several occasions he and Bud Wolf discussed the status of the Wolf Management partnership, Bud Wolf's position in the Wolf Management partnership and trust agreements that Bud Wolf established for his children. An invoice for $3,000 for his services relating to these matters was missing, according to Fox.
Other invoices, addressed to Heaven II Farms, were also introduced into evidence; a $3,000 invoice dated May 1, 1976, and a $2,000 invoice dated May 20, 1976, bore the legend "For professional services re legal and tax matters -- Mayberry v. Wolf"; and another invoice dated December 15, 1976, stated, "For professional services re legal and tax matters -- Barlett v. Wolf and North American Auction Co. v. Harry M. Wolf, Jr. [Bud Wolf] d/b/a Heaven II Farms." Fox explained that these were payments for his Discussions with Bud Wolf and Bud Wolf's attorneys concerning litigation in Texas and Missouri involving Bud Wolf's farm in Kentucky, Heaven II. Fox testified that he traveled to Texas to discuss with Bud Wolf all aspects of the litigation, including the tax and accounting aspects. Fox further testified that he asked the Kansas City office of Wolf and Company to locate a local law firm to represent Bud Wolf in another lawsuit, but that this was not a legal service.
On January 25, 1977, Fox submitted an invoice to Wolf Management for "Professional services re tax matters and legal opinions on current matters for: Jockey International, Inc. $6,000. Blue Grass Industries, Inc. $6,000." Fox testified that these payments were for "any legal opinions Mr. Wolf wanted" concerning contracts and other legal documents involving Jockey and Blue Grass. In 1977 payments for these and other "professional services" by Fox for Wolf Management totaled $64,676. Fox also received $3,313 in 1977 for other services he provided for the Heaven II litigation and $1,000 for incorporating the Heaven II Foundation in Kentucky.
Fox testified that in 1977 he entered into a retainer agreement with Bud Wolf under which Fox became the tax attorney for Wolf Management, Jockey and Blue Grass. In the original draft of the retainer agreement, prepared by another attorney according to Fox' instructions, Fox was described as Wolf Management's accountant, but the final agreement described Fox as Wolf Management's "tax attorney." The retainer agreement stated that Wolf Management would pay Fox $7,000 monthly, "in full payment for all services performed by the Tax Attorney up to December 31, 1984." Fox testified that his continued employment with the Wolf and Company partnership was necessary for the continuation of the payments described in the retainer agreement. While the retainer agreement was in effect, Fox testified, he continued to be the Wolf and Company billing partner for Wolf Management, Jockey and Blue Grass. Fox testified that the payments he received totaled $16,000 in 1976, $68,989 in 1977 and $114,745 in 1978 and that at no time were any of these payments discussed with or turned over to the Wolf and Company partnership. Fox testified that on his tax returns for 1976, 1977 and 1978 he described the payments he received from Wolf Management, Jockey and Blue Grass, three clients of the Wolf and Company partnership, as his compensation for "legal and tax services." Fox ...